Dynamics of the New Retirement Ready Organization

Transcription

1 2014 Edition Annual Defined Contribution Benchmarking Survey Stronger economy provides the building blocks for positive trends in DC plans

2 Contents 3 Executive summary 6 Demographics and background information 8 Hot topics 11 Eligibility and enrollment 18 Contributions 23 Investments 29 Fees 33 Administration capabilities and innovation 38 Provider relationships 41 Plan effectiveness 47 Appendix 2

3 Executive summary An improving economy translates to positive trends in the world of employer-sponsored defined contribution (DC) plans as reflected in the results of the annual Deloitte Defined Contribution Benchmarking Survey. The impacts of greater confidence were evident in a number of areas from the plan design offered by employers to the mind-set of participants. In a significant finding, the survey revealed that the number one reason for lack of employee participation in a DC plan is no longer uncertain economy/job market (14% in compared to 24% in 2012), shifting to lack of awareness or understanding (30% in compared to 21% in 2012). A more stable economy and job market helped remove a degree of employee anxiety about setting aside money for the future, a real barrier to participation in the years following the economic downturn. Supporting this point, the survey showed the average employee participation rate climbing to 77% in from 71% in 2012, and the average account balance rising to more than $95,000 in from $85,600 in This is welcome news for 51% of plan sponsors that ranked high level of participation as the top indicator of plan effectiveness. On a related note, there was little movement in average deferral percentages (ADP) among both non-highly compensated and highly compensated employees. No match for the match While many organizations scaled back as a reaction to the economic downturn, they are now clearly taking steps to make DC plans more accessible and attractive to employees. Immediate eligibility for matching contributions increased to 62% in from 56% in 2012, and unlike previous surveys no plan sponsors indicated a suspended or discontinued company match. At the same time, take advantage of the company match at 43% was the top reason cited for employee participation, unseating personal desire to save for retirement at 39%. In addition, nine out of 10 plan sponsors made no changes to eligibility requirements, while 8% made them less restrictive in compared to 4% in Another 4% of organizations increased the maximum contribution percentages for participants in the past year. Retirement ready or not? Consistent themes reported in previous surveys stayed top-of-mind again this year retirement readiness (78%) and improving participant education (81%) were highly important to respondents in rating the importance to their organization s plan. Aligned with this finding, 72% of respondents feel that just some employees will be financially ready for retirement while 15% believe very few will be ready. Employers continue to work with retirement plan providers to find the right set of tools to build awareness and get employees engaged. The findings of the Deloitte Defined Contribution Benchmarking Survey bring into focus how employers are thinking about and acting upon the challenges of providing a DC plan that effectively supports the needs of employees in saving for retirement as well as the strategic objectives of the organization s overall rewards program. The growing role of DC plans When first introduced, DC plans like the 401(k) were not intended to be the sole or even primary retirement vehicle of the American worker. However, as access to retirement income sources, such as employer-sponsored defined benefit plans continue to decline and Social Security benefits are not the sure thing they used to be, DC plans now represent the main source of future retirement income for a wide and growing majority of the workforce. Plan sponsors are well aware of this reality, and findings from this year s survey underscore the point. When asked to indicate the most important objective of their DC plan, respondents chose increasing participant savings rate (32%) and facilitating optimal retirement income replacement (27%), both of which are linked to improving communication and education efforts (19%). When asked to rate the primary barrier to a more effective plan, the number one reason remained unchanged yearover-year lack of employee understanding (30%). Looking at the top areas of confusion, the survey pointed to employees not knowing what funds to invest in (55%) followed by how much to save for retirement (35%). Recognizing the gaps is a good first step in implementing effective remedies. Annual Defined Contribution Benchmarking Survey 3

4 If you build it, a few will come Retirement plan providers are continually introducing new products and offerings to help plan sponsors build awareness and understanding among employees about the importance of saving for retirement via the DC plan. Resources abound, with 82% of plan sponsors indicating that their record keeper/plan administrator offers valuable tools to educate employees. However, a large percentage of employees are still not engaged or interested. What is the best approach to move the needle? When asked the tactics used to encourage savings and raise awareness of assets needed in retirement, the highest rated approaches were general communications/education (73%) and group meetings (60%). Taking it to the individual level, targeted communications (56%), individual meetings (32%), and personalized communications (23%) were all down from 2012 results. This suggests that communication and education strategies related to DC plans may need to be recalibrated in ways that leverage new, innovative mobile technologies and rely less on traditional channels. Show me the money Another high impact ingredient is personalized communications and education. Almost three-fourths of plan sponsors provide retirement income projections to employees to help illustrate where they may stand financially at retirement age and how increased savings can help them close any gaps. A majority of projections are delivered online, while there was an uptick in the number of plan sponsors sending income projections as separate communications at 15% in compared to 9% the year before. When it comes to individual financial counseling/investment advice, the good news is that 62% of plans make this service available to all or some employees. The bad news is that a relatively small percentage of employees take advantage of it. Once again, the challenge is improving awareness and engagement. One answer may be found in assessing the return on investment on traditional communication channels and determining if less expensive connectivity solutions might do a better job of driving engagement. There s an app for that Leaving no communications stone unturned, retirement plan providers recognize the wired world in which we live, and they continue to make connections via smartphones and tablets. More than half (53%) of plan sponsors indicated their record keepers support transaction processing via a mobile device, with 31% of plans reporting that participants are using smartphone and/or tablet applications to interact with record keepers. Employee satisfaction with these hand-held connectivity tools continues to climb, jumping to 61% in from 53% in 2012 and 28% in This type of result spells TREND in capital letters and underscores the point that plan sponsors should evaluate the effectiveness of using traditional communications vs. going mobile. Welcome aboard With increasing participation a key goal, plan sponsors continue to use automatic enrollment features for newly hired employees. The 2014 survey shows 55% of plans have implemented an automatic enrollment feature. Overall satisfaction with the feature came in at an impressive 97%, due in large part to its positive impact as rated by respondents on plan participation rate (79%), participant awareness (57%) and average contribution rate (56%). With a goal of making it easier to increase savings, 46% of DC plans in the survey now include a step-up contribution feature, which automatically moves a participant s deferral percentage up each year. While annuities garner some attention in the media, there continued to be limited interest from plan sponsors with 6% offering this option in compared to 4% in At the same time, managed accounts gained some ground, offered by 37% of plans vs. 34% the year before, while self-directed brokerage also recorded a rise to 28% in from 22% in These upward trends suggest that plan sponsors are continuing to add new investment vehicles with an eye for increased participation. 4

5 Other findings of note A noteworthy decline in importance was seen in fee disclosure regulations from 73% in 2012 to 60% in, likely attributable to the fact that the new requirements are fully implemented and have a year s experience behind them. Similar to last year, eight out of 10 respondents (82%) characterized participant response to fee disclosures as neutral. On the employer side, approximately half of sponsors (55%) reported a neutral response. Significant shifts were also recorded in with respect to the level of participant activity with their DC plans. Respondents reported the number of employees performing a significant level of activity jumped to 27% compared to 14% in This suggests that the level of interaction is growing for participants, possibly fueled by the ease-of-access via mobile devices as noted above. Annual Defined Contribution Benchmarking Survey 5

6 Demographics and background information In and early 2014, Deloitte conducted an online DC plan survey of 401(k) and 403(b) plans, collecting data from 265 plan sponsors. This report provides an overview of the plan features, policies, objectives, and attitudes of the DC plan sponsors participating in the survey. Throughout this report, we focus on the current issues and trends faced by employers. While the findings of this survey cannot be expanded to reflect the entire population of U.S. DC plan sponsors, it is representative of a broad variety of DC plans. Exhibit 1.2 Please indicate the ownership structure of your company. 35% 65% Employers participating in the survey represented a comprehensive range of industries. Similar to the survey population in 2012, the top three sectors represented were Manufacturing (22%), Consumer Business and Transportation (20%), and Financial Services/Insurance (17%). Over half of the organizations surveyed (65%) have a privately held ownership structure. In considering organization size, most survey respondents came from the largest organizations with more than 5,000 employees. We saw a shift from our 2012 survey population, as the amount of smaller organizations of employees increased to 23% from 12% in 2012, and the amount of organizations of 1,001-5,000 employees decreased to 10% from 30% in (Exhibits 1.1, 1.2, and 1.3) Exhibit 1.1 Please indicate the primary nature of your business. 11% 10% 6% 20% 7% 17% 22% 7% Consumer Business & Transportation Energy & Resources Financial Services/Insurance Health Care & Life Sciences Manufacturing Professional Services Public Sector Technology, Media & Telecommunications Privately held Publicly held Exhibit 1.3 How many employees work for your company? % 11% 13% % 12% 23% 501 1,000 12% 8% 9% 1,001 5,000 38% 30% 10% 5,001 10,000 14% 12% 22% More than 10,000 18% 27% 23% n=265 When viewing plan participation, respondents reported fairly high participation rates. In 2012, the average employee participation rate was 71%; this year s average rate climbed to 77%. The average age group of plan participants remained almost identical to what organizations reported in 2012, with 69% of employers reporting 41 to 50 as the most common participant age range. This year s survey also showed a slight climb in the number of plan sponsors indicating 50+ as the average age at 5%, up from 3% in (Exhibits 1.4 and 1.5) 6

7 Exhibit 1.4 What is the average age of your participating group? Less than 30 0% 1% 1% % 27% 25% % 69% 69% Greater than 50 2% 3% 5% n=220 Exhibit 1.5 What is your current participation rate? % 81-90% 71-80% 61-70% 51-60% 41-50% 31-40% 21-30% 11-20% 1-10% 24% 24% 33% 31% 30% 27% 17% 15% 18% 9% 7% 5% 4% 5% 6% % % 3% 5% 3% 4% 2% 2% 1% 1% 3% 2% 3% 8% 1% 0% 20% 40% Employers were asked to gauge the level of participant activity with their DC plans, and they reported significant shifts from last year s results. Respondents reported a large increase in the amount of participants performing a significant level of activities with their accounts, such as asking questions, executing transactions, and making changes to things, such as deferral rates or investment lineups. This jumped from 14% in 2012 to 27% in. With retirement readiness as a top-of-mind issue for both employers and employees, 32% of survey respondents reported that increasing participant savings rates was their most important plan objective, with facilitating optimal retirement income replacement following closely behind at 27%. (Exhibits 1.6 and 1.7) Exhibit 1.6 What would best describe participant activity related to their 401(k) plan or 403(b) accounts within your plan over the last year? Significant activity (e.g., deferral rate changes, hardship withdrawals, loans, etc.) Some activity (e.g., some questions, some changes but more of a 'wait and see' approach) Minimal activity (e.g., an occasional question, but activity consistent with past years) Reduced activity (e.g., we are seeing less activity than in prior years) 27% 14% 27% 49% 48% 41% 24% 36% 32% n/a 2% n/a Exhibit 1.7 What do you consider to be the most important objective of your plan? n=197 Increasing participant savings rate 32% Facilitating optimal retirement income 27% replacement Improving communication and education efforts 19% Increasing participation rates 12% Improving investment outcomes 5% Improving investment line up 3% Improving asset allocation 1% Minimizing leverage of assets from the plan 1% n=198 Annual Defined Contribution Benchmarking Survey 7

8 Hot topics The 2014 survey explored plan sponsor perceptions in a number of areas and revealed that only 54% believe employees are informed of plan features and investment options, which clearly indicates a gap that needs to be addressed. Eighty-two percent specify that their record keeper/plan administrator offers valuable tools to educate employees and 65% indicate that an employee education campaign would be highly utilized and valuable to employees. This suggests that plan sponsors feel effective tools are available, but are generally underutilized by employees. Only 20% of organizations use the latest communication methods (e.g., social media, smartphone/ tablet applications) to educate employees on retirement readiness, indicating that there is more that can be done to position these tools. (Exhibit 2.1) As in past surveys, getting employees engaged in the DC plan is a continual challenge for plan sponsors. When asked the tactics used to encourage savings and raise awareness of assets needed in retirement, the highest rated approaches were general and multiple communications/education (73%) and group meetings (60%). Taking it to the individual level, targeted communications (56%), individual meetings (32%), and personalized communications (23%) were all down from 2012 results. When plan sponsors were asked to identify the most effective ways to communicate to employees, group meetings (29%) led all other approaches. However, for plans with more than 10,000 employees, targeted communications (32%) were preferred over group meetings (21%). (Exhibits 2.2 and 2.3) Exhibit 2.1 Please indicate whether you agree with the Exhibit 2.1 Please indicate whether you agree with the following statements: following statements: Strongly Agree Agree Neutral Disagree Strongly Disagree Employees are well informed of plan features and 5% 49% 35% 9% 2% investment options. An employee education campaign, either through 10% 55% 26% 7% 2% targeted communications or meetings, would be highly utilized and valuable to our employees. Our record keeper/plan administrator offers 17% 65% 12% 5% 1% valuable tools to educate employees on investment fundamentals and retirement readiness. We utilize the latest communication methods (e.g., social media, smartphone/tablet applications) to educate employees on retirement readiness. 5% 15% 23% 44% 13% n=188 8

9 Exhibit 2.2 How are you, as the plan sponsor, encouraging savings and raising awareness of assets needed in retirement? (Check all that apply) General and multiple communications/ education Group meetings to communicate/ educate % 73% 63% 60% Targeted communications 68% 56% Web to communicate/educate 54% 52% Printed material to communicate/ 54% 52% educate Automatic enrollment/increase 48% 46% Financial counseling/advice 45% 39% Individual meetings to communicate/ 35% 32% educate Personalized communications 32% 23% None of the above 1% 2% Other 1% 2% n=192 Exhibit 2.3 What do you consider to be the most effective way to communicate with employees? Group meetings to communicate/educate 29% Targeted communications 22% Individual meetings to communicate/educate 20% Web to communicate/educate 8% Personalized electronic communications 8% Financial counseling/advice 6% Personalized print communications 6% Digital learning 0% Other 1% n=189 In rating the importance to their organization s plan, providing the right investments to help participants achieve retirement goals continued to top the list with 89% indicating very or quite important, followed by improving participant education at 81% and retirement readiness at 78%. Note that providing the right investments was more pronounced for plans with more than 5,000 employees at 94% compared to plans with fewer than 5,000 employees at 86%. With respect to introducing new retirement income solutions, almost three out of 10 plan sponsors (29%) felt this was important. Interestingly, only 4% of plan sponsors in indicated that they had added an in-plan annuity option, and 5% had added an at-retirement income solution. This raises the question: Why are plan sponsors not taking the leap? (Exhibit 2.4) (See the Investments section for survey findings on retirement income solutions offered by plan sponsors.) A noteworthy decline in importance was seen in fee disclosure regulations from 73% in 2012 to 60% in, most likely due to the fact that the new requirements are fully implemented and have a year s experience behind them. Another downward trend was noted in improving plan governance, compliance, and controls from 66% in 2012 to 57% in. Could a stronger economy have a role to play in this change of emphasis? At the same time, the number of plan sponsors that conducted a retirement readiness assessment for employees in the past 12 months dropped from 32% in 2012 to 21% in. (Exhibits 2.4 and 2.5) Annual Defined Contribution Benchmarking Survey 9

10 Exhibit 2.4 Please rate the following topics based on their importance to your organization s plan and the interests of the retirement benefits committee: Very Important Quite Important Neutral Somewhat Important Not at all Important Fee disclosure regulations 404(a) and 408(b)(2) 22% 38% 22% 14% 4% Retirement readiness of active participants 34% 44% 17% 5% 0% Improving participant education 29% 52% 12% 7% 0% Providing the right investments to help participants 40% 49% 7% 3% 1% achieve retirement goals (including introducing new funds to the plan) Introducing new retirement income solutions to 7% 22% 42% 19% 10% create lifelong retirement income (examples include, but not limited to, annuities, reevaluating plan installments, and individual insurance products) Improving plan governance, compliance, and 23% 34% 28% 13% 2% controls Reducing plan risk and potential fiduciary 31% 42% 17% 8% 2% responsibility Better understanding and potentially reducing plan 25% 49% 18% 7% 1% expenses Improving the quality and/or accuracy of 18% 42% 26% 11% 3% administrative services from our record keeper Improving asset allocation 14% 46% 29% 8% 3% n=189 Exhibit 2.5 Have you conducted a retirement readiness assessment in the past 12 months to determine expected income replacement ratios for employees in retirement? 22% 21% The 2014 survey points to an ongoing emphasis on communication and education around DC plan features, investing, and retirement readiness. In response, plan sponsors and record keepers/administrators are working to identify and implement the most effective tools to build employee awareness and understanding around their financial needs in retirement and saving appropriately in the DC plan to meet those needs. Recognizing the importance of reaching participants in their preferred channel of communication, mobile applications are gaining ground. 23% 34% Yes No, but considering No, not interested 10 No, unaware of this

11 Eligibility and enrollment An improving economy may be helping improve participation in DC plans as evidenced by the 2014 survey. With the economic recovery having taken hold and market performance stabilized, the percentage of plan sponsors who chose uncertain economy/job market as the key reason for lack of employee participation in the DC plan fell sharply to 14% in from 24% in The number one reason for lack of participation cited by 30% of respondents in was lack of awareness or understanding, compared to 21% in Of those plan sponsors citing other as the primary reason (20%), the most common write-in responses related to prioritizing other financial goals and obligations ahead of retirement, and a perception by employees that they cannot afford to contribute. (Exhibit 3.1) Exhibit 3.1 What is the primary reason that employees do not participate in your plan? 2012 Lack of awareness or understanding 21% 30% Lack of a company match 4% 2% Recent market performance has 4% 2% discouraged employees Uncertain economy/job market 24% 14% Employees are saving elsewhere 4% 3% Other 17% 20% Unsure 26% 29% n=188 There was another shift in number one related to the primary reason that employees participate in a DC plan. Here taking advantage of the company match at 43% overtook personal desire to save for retirement at 39%. (Exhibit 3.2) (See the Contributions section for more survey findings on the importance of the match.) Removing barriers By definition, barriers get in the way, and removing barriers for employees to participate in a DC plan remains a major focus as evidenced by the survey results showing that approximately nine out of 10 plan sponsors (91%) made no changes to eligibility requirements in the past year. For those making changes, 8% made them less restrictive in, up from 4% in At the same time, over six out of 10 plan sponsors (62%) indicated no service requirements for plan entry compared to 58% in Age requirements showed little year-over-year change with 42% having none, 29% at age 18, and 29% at age 21. Larger companies are more likely to have no service requirements 70% for plans with more than 1,000 employees vs. 48% for plans with under 1,000 employees. Similarly, larger companies are more likely to have no age requirements 50% for plans with more than 1,000 employees vs. 26% for plans with under 1,000 employees. (Exhibits 3.3, 3.4, and 3.5) Exhibit 3.2 What is the primary reason that employees participate in your plan? 2012 Take advantage of company match 35% 43% Personal desire to save for 43% 39% retirement They were automatically enrolled 13% 13% and did not take action to opt out Proactive communications from 4% 1% your company and/or provider encouraging participation "Word of mouth" - their peers and 1% 0% supervisors participate. Other 1% 0% Unsure 3% 4% n=188 Exhibit 3.3 Have you changed your eligibility requirements in the past year? No 92% 92% 89% No, but considering a 2% 2% 2% change Yes, made them less 5% 4% 8% restrictive Yes, made them more restrictive 1% 2% 1% n=188 Annual Defined Contribution Benchmarking Survey 11

12 Exhibit 3.4 What are the service requirements for plan entry? 27% 3% 8% Immediate 0 to 3 months 4 to 6 months 1 year 62% Exhibit 3.5 What is the minimum age requirement? None 47% 44% 42% Age 18 24% 24% 29% Age 21 29% 32% 29% n=188 Making it automatic It is important for participants to take an active role in retirement planning and investment decision making. However, in some cases, the most effective way to ensure enrollment is for the plan to make the decision. Since the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, plan sponsors were given protection from fiduciary ramifications for automatically enrolling participants (where participants must actively opt out of the plan if they do not want to participate). The 2014 survey reveals that 38% of plans now contain this feature while satisfying the safe harbor conditions defined by the Pension Protection Act of 2006, compared to 32% in For those organizations that have not adopted the feature, 39% indicated the main reason as the participation rate is already high and little benefit would be gained. (Exhibits 3.6 and 3.7) Automatic enrollment did score high marks from plan sponsors in terms of having a positive impact on average contribution rate (56%), plan participation rate (79%), and participant awareness (57%). Overall satisfaction with the feature among respondents stands at 97%. (Exhibits 3.8 and 3.9) The prevalence of 3% as the most common default deferral percentage is rising with 59% of plan sponsors using this level, up from 48% in In terms of a default investment election, the Lifecycle/Target Retirement Date fund continues to be the most popular option with 72% of plan sponsors. A wide majority (86%) of plans offer a Qualified Default Investment Alternative (QDIA) as a feature, with 23% offering a Qualified Automatic Contribution Arrangement (QACA). These features are more prevalent with larger plan sponsors. The survey indicated that QDIAs are offered by 92% of plan sponsors with more than 1,000 employees compared to 70% of smaller plan sponsors. Similarly, 26% of plan sponsors with at least 1,000 employees offer a QACA feature, compared to only 15% of smaller plan sponsors. (Exhibits 3.10, 3.11, and 3.12) Exhibit 3.6 Does your plan contain an automatic enrollment/negative election feature? Yes, satisfies safe harbor conditions defined by the Pension Protection Act of Yes, does not satisfy the safe harbor conditions defined by the Pension Protection Act of Yes, unsure of safe harbor conditions % 38% 16% 11% 9% 6% No, we never had it. 30% 32% No, we discontinued it. 0% 1% No, but considering it. 13% 12% No, we were unaware of this feature. 0% 0% n=188 12

13 Exhibit 3.7 Why does your plan NOT include an automatic enrollment feature? (Check all that apply) We have a high participation rate and do not feel we would benefit from automatic enrollment. 39% Too expensive due to increased cost of match. 20% Too expensive due to increased administrative fees. 4% We have not yet studied the expected impact of automatic enrollment 30% on our plan. Other. 18% n=82 Exhibit 3.8 How have the following been impacted as a result of automatic enrollment? Average Contribution Rate Plan Participation Rate Non-discrimination Results Participant Awareness Positive impact 56% 79% 39% 57% Negative impact 7% 0% 1% 0% No change 31% 16% 53% 39% Too soon to tell 6% 5% 7% 4% n=184 Exhibit 3.9 Are you satisfied with automatic enrollment? 3% Yes 97% No Annual Defined Contribution Benchmarking Survey 13

14 Exhibit 3.10 What is the default deferral percentage for automatic enrollment? % or less 14% 13% 3% 48% 59% 4% 13% 11% 5% 8% 7% 6% (6% or more for 2012) 17% 9% 7% n/a 1% 8% n/a 0% 9% n/a 0% 10% or more n/a 0% n=104 Exhibit 3.13 Have you considered a change to the default investment election for automatic enrollment based on the regulations regarding QDIAs? 88% Yes No 12% Exhibit 3.11 What is the default investment election for automatic enrollment? Principal preservation (stable value, money market, etc.) 3% 5% 4% Balanced fund 9% 7% 8% Lifestyle fund (risk based) 6% 2% 6% Lifecycle/Target 77% 82% 72% Retirement Date fund Managed account 2% 2% 7% Retirement income 0% 0% 0% product (annuity) Other 3% 2% 3% n=104 Exhibit 3.12 Within the automatic enrollment feature, does your plan offer a standard QDIA or a QACA? QDIA 64% QACA 1% Neither 13% Both 22% n=104 Newly hired employees remain the most targeted population for automatic enrollment with two-thirds of respondents, which is consistent with the 2012 level. The 2014 survey did show a slightly higher number of employees opting out or canceling automatic enrollment. (Exhibits 3.14 and 3.15) Exhibit 3.14 When you implemented automatic enrollment, which population was targeted? New hires only 70% 68% 67% Entire population 26% 30% 32% Other 4% 2% 1% n=104 Exhibit 3.15 What percentage of employees opt out/ cancel automatic enrollment? 0% - 5% 73% 74% 63% 6% - 10% 18% 18% 17% 10% - 25% 8% 6% 15% More than 25% 1% 2% 5% n=103 14

15 Taking a step up Plan sponsors continue to seek ways to foster greater levels of savings among participants via targeted awareness and education campaigns. Recognizing the limitations of such approaches, 46% of plan sponsors are taking action through step-up contributions where a participant s deferral percentage is automatically increased each year. Step-up is a strategy more often taken by plan sponsors with more than 1,000 employees, as 56% offer this feature compared to 25% with under 1,000 employees. For 18% of plan sponsors, the step-up is tied to automatic enrollment, while for 28% it is a standalone feature for all participants. For those plans not implementing the step-up, the most common reason cited by four out of 10 respondents was that the expected impact has not yet been studied. For those plan sponsors citing other as the primary reason for not implementing step-up (17%), the most common write-in responses related to administrative burden and lack of management support for the feature. (Exhibits 3.16, 3.17, 3.18, and 3.19) Exhibit 3.16 Have you taken action to increase deferral rates for participants that were originally automatically enrolled? (Check all that apply) Yes, through automatic step-up contributions (a feature whereby the participants' deferrals are automatically increased each year). Yes, through a targeted communication campaign. 46% 23% No. 39% n=105 Exhibit 3.17 Does your plan contain a step-up contribution feature (typically a feature whereby the participants deferrals are automatically increased each year)? Yes, tied to the Automatic Enrollment feature. Yes, as a separate, standalone feature. 19% 18% 18% 30% 31% 28% No. 11% 34% 41% No, but considering it. 36% 10% 12% No, we were unaware of n/a 1% 1% this feature. Other. 4% 6% n/a n=186 Exhibit 3.18 Why does your plan NOT include a stepup contribution feature? 17% 19% 16% 40% 8% We have a high average contribution rate and don't feel that our participants would benefit from step-up contributions Lack of demand from participants for this feature We expect low rates of participant adoption We haven't yet studied the expected impact of step-up contributions on our plan Other Among plans offering step-up, for 52% the feature is automatic for some or all participants, increasing from 46% in For the other 48% of plans, step-up in deferrals must be actively elected by the participant. Annual Defined Contribution Benchmarking Survey 15

16 Similar to 2012 results, about six out of 10 plan sponsors (62%) set the step-up percentage at 1% with another 36% making it the employee s choice. (Exhibits 3.19 and 3.20) For 30% of plan sponsors, the step-up process continues until the employee s elected maximum contribution is reached, while for 27% it continues until the maximum matching percentage is reached. For plan sponsors selecting other (23%), the most common write-in response was that it continues until a fixed percentage is reached. About four out of 10 (38%) plan sponsors allow participants to select the date of the step-up with 19% having it tied to the company s salary increase date. The most common write-in response for plan sponsors citing other (30%) was that the step-up occurs on a specific date each year for all employees. (Exhibit 3.21 and 3.22) Exhibit 3.19 Is your step-up feature elective or automatic? Elective (participants must actively elect to enroll in the step-up program) Automatic for some or all participants (deferrals will automatically increase each year, unless the participant elects out of the step-up feature) % 48% 46% 52% Exhibit 3.20 What is the incremental step-up percentage applied each year? n=98 Exhibit 3.21 How long does your plan continue to step-up the deferral percentage? For a fixed number of years. 5% Until the maximum matching percentage 27% is reached (e.g., up to 6% if your matching formula is 50% of the first 6% of contributions). Until the plan's maximum deferral rate is 15% reached (e.g., up to 15% if the plan allows participants to contribute a maximum of 15%). Until the employee's elected maximum 30% contribution rate is reached. Other. 23% n=161 Exhibit 3.22 When do you step-up the deferral percentage each year? The anniversary date of the participant s enrollment. Tied to the company s salary increase date. Participants select the date. 23% 18% 13% 21% 19% 19% 36% 39% 38% Other. 20% 24% 30% n=85 36% 62% 1% 1% 1% 2% Other percentage (%) Employee's choice 16

17 Utilization of the step-up feature continues to be relatively low, with 50% of plan sponsors indicating that less than 10% of participants are taking advantage of it. However, the percentage of plan sponsors with 11%-25% utilization has increased to 27% in from 20% in 2012, and the percentage with more than 25% utilization is growing, with 23% in compared to 18% in About one-third (36%) of plan sponsors have encouraged participation via a targeted communication campaign. Overall, plan sponsor satisfaction with the step-up feature remains high (80%) with 20% not satisfied due to low utilization by participants. Promoting step-up utilization may benefit from innovative communication approaches that leverage mobile devices to a greater degree. (Exhibits 3.23, 3.24, and 3.25) Exhibit 3.25 Are you satisfied with the step-up contribution feature? Yes. 80% No, due to low utilization by participants. 20% No, due to the design of the feature. 0% n=85 Exhibit 3.23 What percentage of your participants is currently in the step-up contribution program? 0% 10% 64% 62% 50% 11% 25% 23% 20% 27% 25% 50% 8% 14% 17% More than 50% 5% 4% 6% n=84 Exhibit 3.24 Have you taken action to encourage step-up contribution utilization through a targeted communication campaign? 36% 64% Yes No Annual Defined Contribution Benchmarking Survey 17

18 Contributions From an employee contributions perspective, the 2014 survey showed little change in average deferral percentages (ADP). For non-highly compensated employees (NHCEs), the median ADP was 5.2% (compared to 5.6% in 2012), while the median ADP for highly compensated employees (HCEs) was 6.9% (compared to 7.0% in 2012). Fourteen percent of plan sponsors have different contribution limits for HCEs and NHCEs, while 50% have the same limits and 36% do not limit employee contributions other than the regulatory limits (compared to 34% in 2012). Four percent of organizations increased maximum contribution percentages for participants in the past year. (Exhibits 4.1, 4.2, and 4.3) Exhibit 4.1 Based on the results of your most recent discrimination testing, what was the ADP of the HCEs and NHCEs? 2012 HCE ADP 7.0% 6.9% NHCE ADP 5.6% 5.2% n=90 Exhibit 4.2 Do you have different maximum contribution percentages for HCEs and NHCEs? 2012 Yes. 17% 14% No. 49% 50% Our plan does not limit employee contributions, other than regulatory limits. 34% 36% n=183 Exhibit 4.3 Have you changed your maximum contribution percentages (other than for the addition of a Roth 401(k) feature) in the past year? Yes, increased. 7% 5% 4% Yes, decreased. 1% 1% 0% No. 91% 93% 94% No, but considering a 1% 1% 2% change to increase. No, but considering a change to decrease. n/a 0% 0% n=181 The match cornerstone of the DC plan Once again, the 2014 survey revealed there is no underestimating the value of the company match. Consistent with findings over the last three years, the survey showed nearly all plan sponsors (96%) were offering some form of matching or profit-sharing contribution in their DC plans, and there were zero instances of a suspended/discontinued company match recorded in this year s survey. (Exhibits 4.4 and 4.9) With respect to service requirements, matching contributions made immediately upon participation increased to 62% in from 56% in 2012, reflecting an ongoing trend from previous surveys in which more organizations seek to provide a valued incentive for newly hired employees. The prevalence of plan sponsors offering immediate matching contributions varies based on company size. Sixty-seven percent of plans with more than 1,000 employees offer an immediate match vs. 52% of plans with under 1,000 employees. (Exhibit 4.5) 18

19 Exhibit 4.4 Do you offer: Matching contributions 65% 67% 64% Profit-sharing 4% 4% 6% contributions Both matching 24% 23% 26% and profit-sharing contributions Neither 7% 6% 4% n=180 Exhibit 4.5 What are the service requirements for employer matching contributions? Immediate 66% 56% 62% Less than one year 9% 12% 10% One year 18% 23% 24% Other 7% 9% 4% n=161 While the structure of the matching formula used by 82% of plan sponsors is the same for all employees, the matching formula itself varies to a large degree. Of the options listed in the survey, 50% of the first 6% of the employee s contribution led other options at 15%; however, two-thirds of respondents (67%) indicated other, up from 56% in This may suggest that organizations are customizing formulas based off of standard formulas to meet the specific financial metrics of their retirement plans. More than nine out of 10 plan sponsors (91%) made no changes to the matching formula in the past year with 9% making a change. Of those indicating a change, 69% increased the match. (Exhibits 4.6, 4.7, 4.8, and 4.9) Exhibit 4.6 How is your plan s matching formula structured? All employees, same formula More than one employee group, different formulas Multi-tiered contribution formula 81% 82% 82% 13% 12% 14% 3% 3% 3% Varies from year to year 1% 1% 0% Other 2% 2% 1% n=162 Exhibit 4.7 What is the match formula used for the majority of participants in your plan: 25% of the first 6% of the employee s contribution 50% of the first 6% of the employee s contribution 100% of the first 6% of the employee s contribution 100% of the first 3% of compensation and 50% of the next 2% of compensation without immediate vesting 100% of the first 3% of compensation and 50% of the next 2% of compensation with immediate vesting (Safe Harbor) 3% nondiscretionary contribution with immediate vesting (Safe Harbor) 3% 1% 1% 17% 21% 15% 11% 10% 7% 2% 2% 1% 6% 7% 8% 1% 3% 1% Other 60% 56% 67% n=162 Annual Defined Contribution Benchmarking Survey 19

20 Exhibit 4.8 Have you changed your company s matching formula in the past year? Yes. 13% 8% 9% No, and we are not 77% 80% 83% considering any changes. No, but we are considering a change. 10% 12% 8% n=162 Exhibit 4.9 How has your company s matching formula changed? (Check all that apply) Increased match 42% 59% 69% Decreased match 12% 9% 0% Instituted safe harbor 6% 9% 6% Suspended match 6% 5% 0% Reinstated match 13% 14% 6% Instituted discretionary 6% 5% 13% Instituted other formula/ design changes 15% 18% 19% n=16 The wide majority of plan sponsors (88%) allow participants to direct how the matching contribution is invested with 75% permitting this direction immediately. The vesting schedule for matching contributions varies widely, with about one-third (32%) of plans providing immediate full vesting; 30% with four to six year graded; 22% with a one to three year cliff; and 10% with one to three year graded vesting. Most organizations (82%) calculate and deposit the company match each pay period. (Exhibits 4.10, 4.11, 4.12, and 4.13) Exhibit 4.10 Do participants have the option to direct the investment of these matching contributions? 12% Yes No 88% Exhibit 4.11 When do you allow participants to reallocate/diversify these matching contributions to other funds? Immediately 76% 78% 75% Age requirement 0% 0% 0% Service requirement 20% 18% 17% Never 0% 0% 0% Other 4% 4% 8% n=12 Exhibit 4.12 What is the plan s vesting schedule for matching contributions? Immediate full vesting 32% 1-3 year cliff 22% 1-3 year graded 10% 4-6 year graded 30% Other 6% n=144 20

21 Exhibit 4.13 How often is the match calculated and deposited? Each pay period 83% 83% 82% Monthly or quarterly 8% 5% 7% (less frequently than each pay period) Annually (once a year), 2% 3% 3% regardless of hours Annually (once a year), with a required number of hours, or employed on the last day of the year 7% 9% 8% n=162 The Roth 401(k) route A Roth 401(k) is offered by more than half of plan sponsors (51%), which is fairly consistent with 2012 results (53%). The primary reason cited for implementing a Roth was to maintain a competitive plan, which increased to 77% in from 68% in The Roth 401(k) appears to be gaining in popularity, as well, with adoption rates showing more than 10% participation climbing to 24% in from 17% in (Exhibits 4.14, 4.15, and 4.16) Exhibit 4.14 Do you offer a Roth 401(k) feature? 33% 11% 5% Yes No, and not considering it No, but considering it within the next 12 months No, but considering it within the next months 51% Exhibit 4.15 What is the primary reason you have chosen or may choose to implement a Roth feature? 77% 2% 5% 16% A few employees have requested the feature To maintain a competitive plan IRS made the regulation permanent Other Exhibit 4.16 What is the current participant adoption rate of the Roth 401(k) feature? Less than 1% 36% 31% 9% 1% 5% 27% 32% 40% 6% 10% 23% 20% 27% More than 10% 14% 17% 24% n=94 Sixteen percent of plan sponsors offer in-plan Roth conversions. Once again, maintaining a competitive plan was cited as the key reason at 61%, up from 53% in When asked why in-plan Roth conversion has not been introduced to date, the leading reason was not enough interest at 47%. For the 21% of plan sponsors who cited other as the reason for not adopting an in-plan Roth conversion option, the most common write-in responses indicated that regulatory guidance remains unclear and that further research would be needed. (Exhibits 4.17, 4.18, and 4.19) Annual Defined Contribution Benchmarking Survey 21

22 Exhibit 4.17 Did you introduce in-plan Roth conversions? Yes 16% No 84% n=121 Exhibit 4.18 Why did our plan introduce in-plan Roth conversions? A few employees have requested the feature. 14% 22% 17% To maintain a competitive plan. 39% 53% 61% Create tax diversification for employee 28% 25% 22% retirement. Other. 19% 0% 0% n=23 Exhibit 4.19 Why has your plan not adopted an in-plan Roth conversion option? (Check all that apply) Not enough interest 47% Administrative cost relative to expected participation 26% Record keeper/third-party administrator not capable of administrating 16% the option Other 21% n=104 22

23 Investments As noted in the Hot topics section, providing the right investments to help participants achieve retirement goals was the number one topic of importance for plan sponsors. The Investments section of the 2014 survey uncovers some of the thinking around providing those right investments. Looking at the line-up In terms of core investment options, there are few surprises at the top of the list with DC plans (Exhibit 5.1): 85%: Actively managed domestic equity 81%: General/core bond 80%: Actively managed global/international equity 77%: Stable value/guaranteed Investment Contract (GIC) 77%: Lifecycle funds (time based) 73%: Passively managed domestic equity Survey findings revealed some upward trends in options for a DC portfolio with results compared to 2012 (Exhibit 5.1): There continued to be limited interest in in-plan retirement income products (annuities) with 6% of plans offering this option in, up from 4% in Four percent of plans offered Exchange Traded Funds (ETFs), a two percentage point increase from (Exhibit 5.1) Ten percent of plan sponsors indicated they are looking into adding an accumulation annuity to their current plan with 12% looking into adding an annuity purchase option and/or annuity selection software for final plan distributions. (Exhibits 5.2 and 5.3) Proprietary funds make up a high portion (76%-100%) of a fund lineup in 9% of plans, ramping down to a moderate portion of the lineup (26%-75%) in 33% of plans then dropping to a lower portion of the lineup (0%-25%) in 58% of plans. Surprisingly, there was no clear difference in proprietary fund usage based on plan size. Fund lineups were composed of more than 75% proprietary funds for 9% of plan sponsors with under 5,000 employees and for 9% with more than 5,000 employees. (Exhibit 5.4) 37% offering real estate funds compared to 31% 28% offering self-directed brokerage compared to 22% this option is more common among plans with more than 10,000 employees at 44% 26% offering lifestyle funds (risk based) compared to 23% 14% offering socially responsible funds compared to 6% this option is more common among plans with under 1,000 employees at 30% 14% offering custom/hybrid funds compared to 9% Annual Defined Contribution Benchmarking Survey 23

24 Exhibit 5.1. Do you offer the following types of core investment options in your plan: (Check all that apply) Yes Yes, added more than one year ago Yes, added in the past year No No (but considering offering) No (not considering offering) No (had offered but removed the option) Stable Value/GIC 77% 76% 1% 23% 4% 14% 5% Money Market 57% 54% 3% 43% 2% 34% 7% General/Core Bond 81% 79% 2% 19% 1% 17% 1% TIPS (Treasury Inflation Protected Securities) 27% 25% 2% 73% 11% 59% 3% High Yield Bond Fund/Treasury Bond Fund 56% 55% 1% 44% 4% 39% 1% Lifestyle Funds (risk based) 26% 25% 1% 74% 4% 64% 6% Lifecycle Funds (time based) 77% 74% 3% 23% 4% 18% 1% Actively Managed Domestic Equity 85% 84% 1% 15% 2% 11% 2% (i.e., Large/Mid/Small Cap, Value, Growth, Blend) Passively Managed Domestic Equity 73% 71% 2% 27% 4% 21% 2% (i.e., Large/Mid/Small Cap, Value, Growth, Blend) Actively Managed Global/International Equity 80% 79% 1% 20% 2% 16% 2% (i.e., Large/Mid/Small Cap, Value, Growth, Blend) Passively Managed Global/International Equity 56% 52% 4% 44% 6% 36% 2% (i.e., Large/Mid/Small Cap, Value Blend) Emerging Markets 47% 45% 2% 53% 10% 41% 2% Socially Responsible 14% 13% 1% 86% 11% 73% 2% Real Estate 37% 33% 4% 63% 12% 49% 2% Sector Funds (e.g., Technology, Communications, 15% 14% 1% 85% 10% 73% 2% Biotechnology, Health Care, Utilities) Hedge Funds 4% 4% 0% 96% 8% 86% 2% Employer Stock 23% 23% 0% 77% 6% 65% 6% Mutual Fund Window (Mutual Funds only) 15% 15% 0% 85% 8% 74% 3% Self-Directed Brokerage 28% 25% 3% 72% 8% 61% 3% ETFs 4% 3% 1% 96% 8% 86% 2% In-plan Retirement Income Product (Annuity) 6% 5% 1% 94% 13% 79% 2% Custom/Hybrid Fund 14% 13% 1% 86% 7% 77% 2% n=176 24

25 Exhibit 5.2 Have you considered adding an in-plan retirement income product (accumulation annuity) to your current plan? Yes, we are looking into it. Yes, we have added this to the plan. No, we are not considering at this time. 14% 15% 10% 0% 4% 4% 74% 69% 71% Unaware of this feature. 12% 12% 15% n=174 Exhibit 5.3 Have you considered adding an atretirement income solution (annuity purchase option and/or annuity selection software) to your current plan? Yes, we are looking into it. Yes, we have added this to the plan. No, we are not considering at this time. 17% 17% 12% 5% 6% 5% 72% 66% 69% Unaware of this feature. 6% 11% 14% n=174 Exhibit 5.4 Approximately how much of your fund lineup is made of proprietary funds (investment funds managed by your provider)? Moving to the individual participant level, managed accounts gained some ground at 37% (up from 34% in 2012) with plans offering employees the ability to choose a professional manager for their DC plan account where investment decisions are made and executed in line with their objectives and risk tolerance. (Exhibit 5.6) Exhibit 5.5 Do you think your plan offers the appropriate number of investment options? 2012 Yes. 91% 89% No, we should offer more options. 4% 4% No, we should offer fewer options. 5% 7% n=176 Exhibit 5.6 Do you offer managed accounts? 51% 11% 1% Yes No No, but considering it No, unaware of this feature 37% 0% 25% 51% 60% 58% 26% 50% 21% 18% 18% 51% 75% 16% 11% 15% 76% 100% 12% 11% 9% n=176 When looking at the right number of investment options, nine out of 10 plan sponsors (89%) feel they are on target compared to 91% in There was a slight increase in those indicating fewer options should be offered with 7% in compared to 5% in (Exhibit 5.5) Annual Defined Contribution Benchmarking Survey 25

26 Talking to a pro Individual financial counseling/investment advice is available to all or some employees with 62% of plans, down slightly from 65% in For those not offering this feature, cost was cited as a reason by 41% of plan sponsors while 25% indicated they may implement it in the future. The plan record keeper/investment manager is most frequently providing financial counseling/investment advice with 56% of plan sponsors going this route and independent providers used by 32%. Phone consultations are most prevalent for this feature (81%) followed by online support (75%) and face-to-face meetings (60%). (Exhibits 5.7, 5.8, 5.9, and 5.10) Exhibit 5.7 Is individual financial counseling/investment advice available to participants? Yes, to all participants. 50% 61% 57% Yes, to some 5% 4% 5% participants. No, and we are not 28% 25% 26% currently considering this feature. No, but we are 8% 6% 5% considering adding this feature within the next 12 months. No, but we are considering adding this feature within the next months. 9% 4% 7% n=176 Exhibit 5.8 Why is financial counseling/investment advice not offered? (Check all that apply) Cost. 41% Potential fiduciary liability. 45% Employees are not requesting this service. 30% We were unaware of this feature. 0% We are actively researching this feature and 25% may implement in the future. Simply not interested in offering in the DC 13% plan. Other. 7% n=71 Exhibit 5.9 Who currently provides financial counseling/investment advice to participants? Plan record keeper/ investment manager Plan investment manager (if separate from record keeper) 59% 52% 56% 12% 15% 12% Independent provider 29% 33% 32% n=110 Exhibit 5.10 How is this financial counseling/ investment advice delivered? (Check all that apply) Online 75% Over the phone 81% Face to face 60% n=111 For those organizations making individual financial counseling/investment advice available, employee participation levels are at 53% in the 1% to 10% range, at 19% in the 11% to 25% range and at 13% in the more than 25% range. The bottom line is that employee participation in this feature trends on the low side, with similar results posted in (Exhibit 5.11) 26